There are numerous formulas to evaluate a trading strategy. We want to predict if a strategy backtested and worked in the last specific period of time (or trades), would it be able to make a profit in the future? One of those formulas has been developed by Dr. Van Tharp to rank strategies. Markets are changing and what is running the market is not mathematical formulas. However, in the world of trading instead of certainty, probability works, SQN (Strategy Quality Index) is a powerful way to assess your backtested strategy effectiveness in the real market of the future.
SQN is calculated by dividing " R expectancy " to
" Standard deviation of R-multiple" a constant of radical 100, as for 100 trades, will be multiplied to the result.
Markets are run by multiple factors and are not easily predictable by numbers. Formulas, and how they fit to the market they seem to be, are generally stable. Even so-called smart indicators are not real smart magician-bots that could coordinate the market to be ready for use in upcoming situations. In the best situation, they could interpret the past!
On the other hand, even if a fully automated trading strategy, that is developed on mathematical grounds, is tested enough, may make money in the future. SQN formula has been designed in a way that can easily meter market fluctuations and profits in the past. Less fluctuated equity charts in the past got more chance to continue their profitability in the future.
A secret I'm going to share with you is that regarding my backtests of hundreds of strategies on different trading instruments, any SQN over 1.6 is great! If I want to talk more about the details I have to add, according to my more than 300 cases, if a strategy with at least 200 hundred trades got an acceptable SQN over the period of the last 12 years, there is a great chance of around 90% that strategy would be profitable in the next trading year!
In conclusion, I think using SQN despite all criticism could be your holy grail in the world of trading. Don't miss it and in terms of money and risk management, get yourself ready for a 10% probability of loss!
SQN is calculated by dividing " R expectancy " to
" Standard deviation of R-multiple" a constant of radical 100, as for 100 trades, will be multiplied to the result.
Markets are run by multiple factors and are not easily predictable by numbers. Formulas, and how they fit to the market they seem to be, are generally stable. Even so-called smart indicators are not real smart magician-bots that could coordinate the market to be ready for use in upcoming situations. In the best situation, they could interpret the past!
On the other hand, even if a fully automated trading strategy, that is developed on mathematical grounds, is tested enough, may make money in the future. SQN formula has been designed in a way that can easily meter market fluctuations and profits in the past. Less fluctuated equity charts in the past got more chance to continue their profitability in the future.
A secret I'm going to share with you is that regarding my backtests of hundreds of strategies on different trading instruments, any SQN over 1.6 is great! If I want to talk more about the details I have to add, according to my more than 300 cases, if a strategy with at least 200 hundred trades got an acceptable SQN over the period of the last 12 years, there is a great chance of around 90% that strategy would be profitable in the next trading year!
In conclusion, I think using SQN despite all criticism could be your holy grail in the world of trading. Don't miss it and in terms of money and risk management, get yourself ready for a 10% probability of loss!
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The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.